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3 Cheap Stocks for Aggressive Investors

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Investing always involves a tug of war between safety and the desire for high returns. Right now, though, even if you're a value investor, an unusual dynamic makes it worth your while to take a look at stocks you might have rejected as being too risky.

A number of analysts have pointed out some valuation distortions between stocks seen as having defensive characteristics and the rest of the market. In particular, safety-conscious investors have bid up prices of stocks in less volatile industries, while leaving other sectors that are more tied to the ups and downs of the business cycle trading at a discount. If you're willing to take a contrarian view with your portfolio, you may be able to exploit those conditions to your advantage.

Fear overcoming greed
The motivation for why investors are willing to pay more for defensive stocks is obvious: they're scared of what may be coming down the pike for the stock market. With major indexes having doubled from their 2009 lows, many investors fear that with all the geopolitical and macroeconomic risks facing the world right now, the gains in the market over the past few years may prove all too short-lived.

As a result, risk-averse investors are looking to low-volatility names that tend to hold up better in down markets. For instance, both Coca-Cola (NYSE: KO  ) and Southern (NYSE: SO  ) have volatility figures less than half of the overall market, yet they've enjoyed gains that nearly match the S&P's return over the past year. But profits haven't kept up, and so the stocks sport higher earnings multiples -- 21 for Coke and 19 for Southern -- which is not exactly bargain territory.

At the same time, though, investors who are fearful of a renewal of economic weakness are in no hurry to run out and buy economically sensitive stocks. You can therefore find what look like sweet deals on some stocks of cyclical companies that appear to be priced for a big economic contraction. Here are a few.

Freeport-McMoRan Copper & Gold (NYSE: FCX  )
When it comes to predicting economic activity, many investors believe that copper is king. And when you think about copper, Freeport-McMoRan is an obvious choice, with solid reserves of copper, gold, and other important metals. The company is a leader within the mining industry.

Investors have bid down Freeport-McMoRan shares because of slowdowns in construction activity and industrial growth. Yet with the stock trading at just seven times forward earnings estimates, and just over 10 times trailing earnings, investors have a huge margin of safety against any slowdown that may come.

Chesapeake Energy (NYSE: CHK  )
Similarly, energy stocks have gotten punished by fears of economic weakness. As overall activity decreases, the need for energy also goes down, and that comes back to punish the prices that determine how profitable companies like Chesapeake are.

Of course, Chesapeake has its own unique problems related to management. But as scary as those problems may appear, the stock currently trades at six times trailing earnings, and even though profits are expected to take a huge hit this year and next, the valuation is still fairly attractive. Combine that with the prospect that natural gas prices may have bottomed and that activist investors may unlock more of the natural gas giant's value, and you have a reasonable bull argument for Chesapeake.

CSX (NYSE: CSX  )
One area of the market that hasn't risen to new highs is transportation. Despite the advantages of rail transport over less-energy-efficient alternatives like trucking, the slowdown in coal transport stemming from Asia's decelerating growth has had an impact on CSX and its peers.

In particular, CSX trades for just 13 times trailing earnings and 11 times forward estimates, yet it pays a 2.5% dividend that it covers easily with net income. More importantly, it's working hard to diversify its customer base and find ways to soak up excess capacity. Even in a recession, people won't stop needing the things that CSX transports, and that should help put a floor under the stock no matter what happens.

Never fear
When markets are choppy, it's always tempting to stick to safe picks. But when the market offers you bargains, you really need to take advantage of them. For opportunistic investors, these three somewhat aggressive picks should do you more good over the long haul than high-priced names in more traditionally defensive sectors of the market.

Another place to look for smart picks is where Wall Street typically doesn't look. We've found three hidden treasures, and we're naming names in our latest special report: "3 Middle-Class Millionaire-Maker Stocks." It's free and waiting for you.

Fool contributor Dan Caplinger gets aggressive when he needs to. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola, Freeport-McMoRan Copper & Gold, and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Southern and Coca-Cola. You can follow him on Twitter @DanCaplinger. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is as calm as a baby.


Read/Post Comments (10) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 18, 2012, at 12:14 PM, jellybeandream wrote:

    Hello Dan,

    Thank you for your ideas. Please can you elaborate on your comment: "When it comes to predicting economic activity, many investors believe that copper is king." In what regard? Does copper act as an economic indicator? How does it correlate?

    Many thanks in advance.

  • Report this Comment On August 18, 2012, at 1:00 PM, mountain8 wrote:

    I believe perhaps, copper is one of the first to benefit from a recovery. Then the statement would seem to indicate the market follows coppers price moves. Copper goes up, the market goes up, and the reverse.

  • Report this Comment On August 18, 2012, at 1:54 PM, MASTERHF wrote:

    Defensive stocks like Coca-Cola and Wal-Mart have been moving sideways in the last 13/14 years. However, in the past, this stocks registered big higher moves after some years of stagnation: 1000% for Coca-Cola and 2400% for Wal-Mart (https://sites.google.com/site/higheralphaideas/home/atall-ti... ). So I believe that this stocks represents a good buying opportunity at this moment!

  • Report this Comment On August 18, 2012, at 4:26 PM, 102971 wrote:

    I think that your suggestion re Chesapeake is way off.

    I would rather be short of this stock..

    BAD recommendation!!!!!!!!!

  • Report this Comment On August 18, 2012, at 6:11 PM, stikMup wrote:

    People keep flip flopping me on CHK I dont know what to do...

  • Report this Comment On August 19, 2012, at 5:39 PM, TMFGalagan wrote:

    @jellybeandream - The theory is that strong economic activity increases demand for copper, which pushes prices up. So high copper prices correlate to a favorable level of economic activity, while lower copper prices suggest a less dynamic economy.

    best,

    dan (TMF Galagan)

  • Report this Comment On August 19, 2012, at 10:07 PM, ChrisOglesby wrote:

    Agree Chesapeake has too many goverance issues and conflicts of interest to warrant a recommendation. There are much better-managned oil companies trading at similar PE's.

  • Report this Comment On August 21, 2012, at 2:18 PM, n8larson wrote:

    CHK's low PE and theoretical industry tailwind don't automatically make a good bull argument for aggressive investors. "Aggressive" doesn't just mean 'willing to accept more risk'. To me, anyway, it means 'willing to do more work to understand the risks'. CHK's cheap for a well-documented reason. While it might reward someone who buys today, it wouldn't (IMO) be because the buyer was aggressive, it would be because they were betting on a change that wasn't foreseen--a reason that often goes by the name "luck".

  • Report this Comment On August 24, 2012, at 12:19 PM, daveletsgo39 wrote:

    do you believe options are a viable play for the retail investor? i've looked at this tool .with 90% expiring worhless.and the arguement they are in cashed before expiration.it's diffcult enough finding co.'s that are not over-valued.in light off the face-book fiasco.i think was a delibert play of the retailers.

  • Report this Comment On September 13, 2012, at 9:37 AM, seedysan wrote:

    WHERE ARE YOUR ENVIRONMENTALLY RESPONSIBLE RECOMMENDATIONS? RETRACTIONS OF OUTMODED OR MISTAKEN RECOS?

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

11/26/2014 4:02 PM
CHK $23.04 Down -0.66 -2.78%
Chesapeake Energy CAPS Rating: ****
CSX $37.91 Up +0.03 +0.08%
CSX Corp CAPS Rating: ****
FCX $29.34 Up +0.06 +0.20%
Freeport-McMoRan C… CAPS Rating: ****
KO $44.29 Up +0.17 +0.37%
Coca-Cola CAPS Rating: ****
SO $46.82 Up +0.35 +0.75%
Southern Company CAPS Rating: ****

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